Market Pulse | Worry in China, Drama in Europe Weigh on Luxury Sector

LONDON, United Kingdom — The Savigny Luxury Index (“SLI”) fell 4.2 percent in June, relative to an uplift of 4.0 percent in the benchmark MSCI World Index (“MSCI”). Worrying news out of China, the continued drama of the European debt crisis and downward revisions in growth estimates for 2012 caused the sector to go out of favour.

Big news

The month started off with a bang: China announced a slowdown in its factory output for the month of May and on the same day Graff pulled its Hong Kong IPO, citing treacherous market conditions, causing the SLI to tumble by 5 percent.

The lack of certainty as to the depth of the Eurozone debt crisis and its resolution caused significant volatility in the SLI over the month.

With the exception of current industry darling Michael Kors, which remained bullish for the year, sector players announcing their results have all expressed caution over the outlook for 2012 and, in particular, for the European and US luxury markets. Industry bodies Altagamma and FHS, the Swiss watch industry body, estimated that the luxury goods market and luxury watch market would grow by 7 percent and 5 percent respectively in 2012, versus circa 20 percent in 2011.

Michael Kors also reported full year results above market expectations and maintained a positive outlook for 2012 (estimated sales growth of up to 45 percent for the year), resulting in a price increase of 6.2 percent for the month.

Luxottica’s share price was boosted by the announcement of a ten-year licensing deal with Armani.

Going down

Mulberry lost more than a quarter of its market value as its year-end results fell short of high market expectations, also aggravated by its announcement that trading was slow in the first ten weeks of its new financial year.

Coach was down by over 13 percent based on expectations that the leather goods giant won’t meet its growth targets.

What to watch

Brazil is gaining in importance as a strategic market for luxury goods, as evidenced by a number of watchmakers looking to open directly operated stores in the country.

Sector Valuation

Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry.